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Business Acquisition
 12 Months Ended
Dec. 31, 2016
Business Acquisition

3. BUSINESS ACQUISITION

On July 1, 2015, the Company completed its acquisition of Shannon Systems, China’s leading enterprise-class PCIe SSD company based in Shanghai, China. In exchange for 100% of outstanding shares of common stock of Shannon Systems, the Company issued 1,560 thousand ordinary shares with fair value of US$7,640 thousand and paid approximately US$37,925 thousand in cash. The value of the 1,560 thousand ordinary shares issued was determined based on the market value of the Company’s common shares at the date of the acquisition, discounted for the fact that the shares are restricted as to their marketability for a period of five years from the issuance date. In 2015, the Company incurred US$359 thousand of acquisition costs which comprised primarily of transaction fees and direct acquisition costs, including legal, accounting, and other professional fees. These costs are included in the line item of “operating expenses—general and administrative” on the consolidated statements of income. The acquisition will expand the Company’s portfolio of embedded storage products.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

     US$  

Cash and cash equivalents

      1,903  

Accounts receivable, net

      946  

Inventories

      2,624  

Other current assets

      289  

Property and equipment

      71  

Goodwill

      33,204  

Identifiable intangible assets

      8,381  

Accounts payable

      (644 ) 

Accrued expenses and other current liabilities

      (1,209 ) 
  

 

 

  

Net assets acquired

      45,565  
  

 

 

  

As of December 31, 2016, of the cash consideration of approximately US$37,925 thousand, US$ 5,735 thousand has not been paid to the former shareholders of Shannon Systems and are included in other long-term liabilities on the consolidated balance sheets as of December 31, 2015 and 2016.

The excess of the purchase price over the fair value of the net tangible assets acquired has been reflected as identifiable intangible assets. The identifiable intangible assets and respective useful lives are as follows:

 

     US$      Useful Life  

Developed technology

      3,789        3.5  

In-process research and development (“IPR&D”)

      4,592        indefinite  
  

 

 

     

Total identifiable intangible assets

      8,381     
  

 

 

     

Developed technology represented the existing know-how in enterprise-class PCIe SSD including all the developed and in-process products for the Shannon Systems business.

The estimated fair value of IPR&D was defined as research and development projects related to enterprise-class PCIe SSDs in-process at the time of the transaction that had not demonstrated their technological feasibility and that do not have an alternative future use.

Goodwill represents the excess of the purchase price over the estimated fair values of the net tangible and intangible assets. The factors that contributed to the recognition of goodwill primarily relate to expansion into new product areas and potential synergies created from combined capabilities, and goodwill is not expected to be deductible for tax purposes.

The results of Shannon Systems since the acquisition date included on the consolidated statement of income for the year ended December 31, 2015 were as follows:

 

     US$  

Net sales

      9,049  

Net income

      421  

 

The operating results of Shannon Systems have been included in the Company’s operations beginning July 1, 2015. The following unaudited pro forma information represents a summary of the results of operations as if the acquisition occurred on January 1, 2014 and 2015 and includes certain pro forma adjustments, including amortization of identifiable intangibles from that date (in thousands except earnings per share):

 

     Year Ended December 31  
         2014              2015      

Net sales

      293,562        364,670  

Net income

      42,483        58,468  

Earnings per share

      

Basic

      0.31        0.42  

Diluted

      0.31        0.42  

Weighted average ordinary shares outstanding (thousand)

      

Basic

      136,164        138,880  

Diluted

      138,347        140,414  

The pro forma results are based on various assumptions and are not necessarily indicative of what would have occurred had the acquisition closed on January 1, 2014 and 2015.